Treasury Management Services

Retirement Services

The Ten "Don't"s of 401(k) Investing

By Christopher Carosa, CTFA

1: Don’t Wait to Start

This goes along the line of “Don’t put off to tomorrow what you can do today.” Brooks Herman, head of research at BrightScope in San Diego, California, says, “New savers usually think they can save more later in life when they earn more money. They should start now! Saving money is like exercise: it’s a behavioral habit people should start early and do often.” Not only is it harder to develop good savings habits when you’re older but also waiting causes you to miss all the wonderful delights that come from compounding.

2: Don’t Assume Everything Will Be Perfect

Along the way, you’ll need to make several assumptions. You’ll even have to repeatedly update those assumptions. It’s always safer to err on the side of caution. Elle Kaplan, CEO & Founding Partner at Lexion Capital Management LLC in New York City, says, “Every assumption you make should be extremely conservative. Your savings become your paycheck and must last the rest of your life. It’s easy to find ways to spend extra money, but much more difficult to deal with a shortfall.”

3: Don’t Fail to Plan

To paraphrase one of those ubiquitous posters: “Retirement is a journey that begins with a single step.” Such is the planning process. Jeff Stoffer, principal at Stoffer Wealth Advisers in San Rafael, California, says, “Planning is about answering the questions, ‘When can I retire?’ and ‘Will I have enough money to last my lifetime?’ Planning starts with generating ideas about what you need and want in retirement. Visualizing what retirement looks like for you is a step in planning that tends to be overlooked. Planning for the future can seem abstract, almost like fantasizing. In order for us to get excited about it and hold it as a goal, it needs to be attractive to us. We will be more likely to put our money toward it if it is something real in our mind’s eye.” Those who fail to plan, plan to fail.

4: Don’t Put Off Saving if Your Company Doesn’t Match.

Worse than not taking the “free” money of company matching is the act of not saving just because the company doesn’t match. Stephen D. Laconis, a financial planner at Bridgeworth Financial, LLC in Birmingham, Alabama says, “A common misconception is that ‘if my employer doesn’t match, I shouldn’t contribute.’ This is very dangerous. The only person responsible for your retirement future is you. Save no matter what your employer is matching.”

5: Don’t Just Keep Contributing the Same Amount Every Year.

Once you start to save, that’s great, but it’s only the first step. Your contribution percentages should increase as your pay increases. “Commit to increasing each year, give yourself a retirement raise annually,” says Paula Hendrickson, director retirement plan consulting at First Western Trust in the Greater Denver area. She continues, “The sooner you can be contributing between 10-15%, the better chance at success – I have never met a participant in a retirement plan that told me ‘they saved too much’.”

6: Don’t Assume You’ll Need Less Money When You Retire.

Joseph F. Ready, executive vice president at Wells Fargo Institutional Retirement and Trust in Charlotte, NC, believes too many people incorrectly say to themselves, “I will need a lot less money in retirement than I do now.” He says, “Many experts recommend that people expect to spend about 80% of their annual pre-retirement household income during retirement. That may seem high, but the retirement landscape is changing as baby boomers prepare for more active retirements than earlier generations. Job-related expenses, travel, entertainment, home repairs/remodeling, health care, and other costs can all boost the price tag of an active retirement.”

7: Don’t Assume You Won’t Live Long.

Ready also believes people convince themselves “I won’t live that long.” This is a problem, he notes. “The good news is that Americans are living longer,” he says. He adds, “But with a longer life expectancy comes the need to fund a longer retirement. Building a nest egg to sustain 30 years of retirement (instead of 10 to 15 years) can help ensure that you don’t outlive your savings.”

8: Don’t Bring a Knife to a Gun Fight.

Michelle Ford, CEO of LifeLong Retirement Corp in Bridgewater, New Jersey, says, “Understand there are two parts to retirement planning. There is the accumulation phase (build the pot) and then the distribution phase (spend down). If you understand that there will be a spend-down, then the accumulation phase should be planned with this in mind. In other words don’t just build the assets, put them in the right tax advantaged accounts (in line with don’t bring a knife to a gun fight). The distribution phase is all about income planning, so educate yourself on A) how much you actually spend, B) your guaranteed income sources and their applicable rules/choices, and C) how do taxes impact your varied sources of income and how do they interlace together.”

9: Don’t Leave Your Retirement Savings in the Company’s Plan When You Retire.

Stephanie Ackler, CFA, managing director of investments at Ackler Wealth Management of Wells Fargo Advisors, LLC, in New York City says, “When you leave a job or retire, consider rolling over your 401k plan(s) into an IRA for easy tracking and consolidation and to continue the tax deferral status for as long as possible.”

10: Don’t Panic, Be Patient.

Karen Lee, owner of Karen Lee and Associates, LLC in Atlanta, Georgia, believes one of the most important rules and principles regarding savings is to “be consistent and patient.” Ilene Davis, a financial planner at Financial Independence Services in Cocoa, Florida, wants you to avoid the very thing that prevents consistency when she advises “Don’t Panic!!!”